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Green bonds to exceed $40 billion in 2014

<p>The first seven months of this year matched the dollar volume of the previous six years. Why are green bonds so hot...and are they growing unchecked?</p>

Any new approach to a problem requires critics. Critics, with their voice, draw attention to the subject matter and thereby validate its importance. Critics also help refine the subject matter. Such is the case with green bonds: bonds whose proceeds finance projects, such as wind, solar, geothermal energy and energy efficiency retrofits that enable a cleaner energy economy.

Investors are flocking to green use-of-proceeds bonds in part because of their simplicity: there is no difference between the credit quality of a green use-of-proceeds bond and that of a normal bond from the same issuer; the yield and the liquidity are also essentially the same; therefore, investors can participate in green use-of-proceeds bond investments without changing their mandates.

The market for green bonds has existed in one form or another since about 2007, but only recently exploded. According to Bloomberg, $18 billion of green bonds has been issued as of early August 2014. That already matches, in seven months, the total volume done from the inception of the market in 2007 to the end of 2013, a six-year period. At this pace, the market will exceed $40 billion this year.

Guidelines keep growth from running wild

This explosive growth has led some to ask: What are the universal principles that should govern green bonds? To address these critiques, earlier this year Bank of America came together with many of our peer financial institutions, including Citigroup, JPMorgan Chase, Deutsche Bank and HSBC, to consult investors in and issuers of green bonds to assess the essentials of green bonds and, from that feedback, to develop a set of Green Bond Principles [PDF]. These voluntary guidelines provide a recommended process and framework for these bonds. They encourage transparency, disclosure and integrity in the development of the green bond market.

This framework has enabled the recent strides in the market. The Green Bond Principles now has a governance structure that is set up to meet investor needs.

For financial institutions like Bank of America, issuing and underwriting green bonds make good business sense. Bank of America issued the first-ever green bond from a corporate bank of $500 million in 2013, which helps address climate change by funding energy efficiency and renewable energy projects. Through this process, we witnessed a whole new world of investors interested in aligning their investments with their environmental principles.

Corporate clients such as Toyota, French-Dutch real estate company Unibail-Rodamco and NRG Energy's NRG Yield Co, are now using green bond proceeds to finance loans to purchasers of hybrid and other energy-efficient vehicles, construction or retrofitting of buildings to higher energy efficiency standards and the purchase of wind farms or other renewable energy assets.

Keep the conversation going

The dialogue and debate around green bonds is an important one, and should continue. The green bond market continues to grow and will evolve over time.

In the meantime, green bonds enable corporations and investors around the globe to act in ways that benefit the environment. And as the volume increases, the dialogue around green use-of-proceeds bonds leads to dialogue around investments in green project bonds, green asset-backed securities, green convertible bonds and green energy access funds — that is, more direct investments in clean energy, where the risks may take longer to analyze, but the returns may be more rewarding. These more complex investments will increase the velocity of funds flowing to the transition to a lower carbon economy.

It all starts with a willingness to have the conversation.

The conversation has already begun and the volume is increasing. Green bonds are already helping to expand and grow the cleaner energy market. And thanks to critics, we can only expect more attention, validation and refinement of the subject matter.

Top image of Wall Street sign with green light by Roman Slavik via Shutterstock.

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